What is a Gap Opening?

Mary McMahon
Mary McMahon

A gap opening is an opening price for a security that exceeds or falls below the closing price, indicating that something changed overnight or during the weekend. This term can also be used to refer to the value of the market as a whole. Gap openings happen when people react to news and events, causing fluctuations in trading prices. If the change appears to persist into the day, it can indicate a developing trend. Some markets will delay opening or remain closed if extraordinary situations like declarations of war occur, to reduce the risk of volatility.

Man climbing a rope
Man climbing a rope

There are several different kinds of gap opening. In a partial gap up, the price of a security is trading up from where it was when the market closed, but it has not reached the previous day's high. A full gap up is a price above the previous day's high. Conversely, partial gaps down are lower than the closing price, but have not hit the price floor reached on the previous trading day, while full gaps down are trading lower than the lowest price recorded on the previous trading day.

Gap openings can develop for a number of reasons. News about a company is a common cause, with the market reacting to announcements like takeover bids, mergers, and bankruptcy filings. Industry news can also affect values across an industry or in leading companies, with people responding to falling sales, increasing prices for raw supplies, and other important events in an industry. Finally, global news can also affect the values of securities and markets and cause a gap opening.

When a gap opening occurs, analysts track it closely. It may correct within a few hours of the market's open as traders respond, while in other cases, it can hold steady. If it does, it suggests the change in value overnight is not a fluke and may be a sign of an underlying trend. This can drive the price up if it opened high, as people will compete to get shares, and may cause the price to drop if it opened low as people attempt to unload their shares before taking a loss.

In order to close a market for a day or delay opening, officials must usually show that the market as a whole will experience a gap opening and that opening the marker could contribute to increased volatility and instability. Most nations are reluctant to close financial markets, even in crises, as this can create a lack of confidence among consumers and investors.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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